Privacy Coins refer to cryptocurrencies in which transfers are made anonymously and the identity of the parties is not shared. Privacy coins refer to a class of cryptocurrencies that hide the origin and destination address of blockchain transactions to enable private and anonymous transfers. Such cryptocurrencies scramble transactions using various techniques to hide the true wallet balance and address of the parties and avoid chain analysis.
On the other hand, blockchain networks that operate based on transparency, such as Bitcoin, allow public addresses and transactions to be visible to everyone. This makes it relatively easy to track a person's deposits and withdrawals of assets. On the other hand, privacy coins have the features of being anonymous and untraceable. Untraceability makes it virtually impossible for third parties to trace transactions using services such as blockchain analytics, while anonymity hides the true identity of the transaction.
What Are the Strategies Used by Privacy Coins?
Privacy coins employ various strategies to remain anonymous and untraceable:
- Stealth addresses
- CoinJoin
- Zk-SNARKs
Stealth Addresses
Stealth addresses require a new address to be created with each transaction to avoid a link between the sending and receiving parties.
CoinJoin
CoinJoin is used for the execution of privacy coin transactions. It combines transactions from different users into a single transaction package and then distributes this package through the users' new address information.
Zk-SNARKs
Zk-SNARKs is a mathematical structure used to provide privacy and security in the cryptocurrency space and is based on the zero-knowledge protocol. This protocol prevents one party from proving that it has information but prevents the other party from learning this information.
Are Privacy Coins Legal?
Whether privacy coins are legal or not depends on the users' jurisdiction. For instance, in South Korea, it is illegal to use privacy coins. South Korea aims to prevent money laundering in this way. While some jurisdictions have not banned the use of privacy, they have not fully endorsed them. Such assets often exist in a gray area and are not clearly defined in legal regulations. The US government, for instance, is taking a different approach by trying to develop tools to scrutinize and track transactions taking place on privacy-based networks.
It is not always the case that privacy-based transactions encourage malicious activities such as money laundering or terrorist financing. While some users value financial privacy and exercise their fundamental right to it, there is also a growing backlash from government agencies against privacy-enabling digital assets. Interestingly, many prominent figures such as Naval Ravikant, Elon Musk, and Edward Snowden continue to advocate for privacy-based practices.
On a global scale, it is important to follow the steps and guidance issued by regulatory bodies such as the Financial Action Task Force (FATF) against privacy coins. While privacy assets have not yet been banned, regulations such as the FATF Travel Rule can complicate matters in countries and exchanges with information-sharing requirements.
What Is Dash?
Dash is a cryptocurrency that emerged in 2014 after forking from the Bitcoin network. It was initially called XCoin, then DarkCoin, and finally Dash. Dash was developed as a cryptocurrency with privacy-based features. However, it is not fundamentally anonymous. Dash focuses on usability and user protection in its development process, and information such as wallet balances, addresses, and other transaction details are shared publicly on the blockchain unless users activate privacy features.
What Is Monero?
Monero is a cryptocurrency that offers the strongest privacy features on the market, using powerful privacy features such as RingCT, stealth addresses, and multiple ring signatures. Monero's privacy features ensure anonymity by hiding the actual amount of transactions, the sender's address, and the recipient's address.
What Is Zcash?
Zcash was launched in 2016 and is another privacy coin that shares the same root code as Dash, which forked from the Bitcoin network. It is managed by Electric Coin Company, and it uses the energy-intensive Proof of Work mechanism to confirm transactions.
Zcash takes a privacy-focused approach, offering protected transactions and the option to hide transactions through privacy-based and untraceable mechanisms called zk-SNARKS. This mechanism provides privacy while proving the validity of transactions without revealing details. Zcash's protected transactions feature allows users to hide transaction amounts, the sender's address and the recipient's address. This makes transactions untraceable and provides a higher level of privacy.
What Is Beam?
Beam is a platform that is a privacy coin system and uses a next-generation anonymous blockchain technology called Mimblewimble to ensure privacy. In addition to its privacy features, Mimblewimble improves the scalability of Proof of Work protocols by offering advantages such as faster downloads, easier verification and synchronization, and data solutions that require less storage space. Beam makes it possible to perform untraceable transactions through unidentified addresses. In addition, Dandelion, a mechanism used in the system, masks network traffic. With this mechanism, small transactions of a certain length are bundled together and added to the block as a single large transaction. This makes it difficult to monitor and analyze transactions.
What Is Grin?
Grin is a cryptocurrency launched in January 2019 and shares the same Mimblewimble blockchain structure as Beam. It stands out among privacy assets by being censorship-resistant and scalable. One of the most notable features of Grin is that it has an anonymous founder, which makes it different from other cryptocurrencies. For this reason, it is supported by incentives to developers, usually in the form of donations.
